Report explores affordability crisis
It’s official – 2022 is now considered the worst time in recent decades for first home buyers to enter the New Zealand property market, according to economic consultancy Infometrics.
The effects of COVID-19 and the ultra-low interest rates have worsened generational gaps in housing, turning affordability issues into a full-blown crisis not seen since 1957.
"Our analysis suggests that the millennials wanting to enter the market now face the least attractive housing prognosis since their grandparents in the 1950s, if not longer,” Infometrics’ Housing update 2022: A new lens on affordability report said.
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Gareth Kiernan (pictured), chief forecaster at Infometrics, has identified two key factors that contribute to this conclusion: one, the increased proportion of a household’s income needed to service the loan throughout the mortgage and; two, the increase in property value over the life of the loan.
"Our analysis shows that even with mortgage rates below 5%, the average home's million-dollar price means that today's first-home buyers face much less favourable financial outcomes than a buyer in 1987 did with interest rates of 20%," Kiernan said.
Alarmingly, the report shows that current mortgage holders are now committing an average of 33% of their income to mortgage repayments for the next 25 to 30 years.
The figure was much worse for first home buyers, who face initial mortgage repayments equal to 49% of their income due to soaring house prices.
Infometrics said this figure was the highest on record, surpassing previous records from 1987 and 2007. Unlike 1987, there was no “likelihood of the very strong income growth that quickly reduced the debt burden of the 1980s” that could be observed today.
First home buyers entering the market in 2021-22 also risk buying close to the peak of the market, which means less capital appreciation and financial benefits that homeownership otherwise offers.
"Young people are effectively signing themselves up for a lifetime of debt if they want to get into the housing market, with much less money left over for discretionary spending than previous generations enjoyed,” Kiernan said.